An unlikely story: how did this historic rock become a dynamic and modern financial centre? (Shutterstock)
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Rock steady: the story of Gibraltar’s booming insurance sector

Gibraltar’s insurance sector has seen explosive growth since joining the single market: one in six UK motorists are now covered by a company on the Rock. Yet, as in the UK, it remains a challenge to convince young people that insurance is “as glamorous as being a barrister”, says Chris Johnson, chairman of the Gibraltar Insurance Association

Gibraltar in the late 1990s accommodated no more than a dozen insurance companies. Remarkably, this has now grown to over 50 companies with more than £3.5bn of premiums written here, and nearly £10bn of assets in insurance companies.

What, then, has driven the growth of Gibraltar’s insurance industry over the last 20 years, and what does it look like now?

Gibraltar is an unusual community - a British Overseas Territory located at the southernmost tip of Europe. It can be slightly odd sometimes to arrive here, driving in from Spain, and see British policemen’s helmets and red phone boxes. The place is full of history, having been ceded to the British crown in perpetuity by Spain over 300 years ago. Today it is home to colonies of tailless monkeys that are fiercely protected (it is a popular local myth that if the monkeys leave, Gibraltar will cease to be British). But it also has a less whimsical side – Gibraltar has always been a mini-nation of merchants and traders and it takes its business seriously.

In 1997, Gibraltar acceded to the Single European Market for Insurance, its regulatory body (the Financial Services Commission) having been recognised as a competent regulatory authority within the EU. This meant insurers that had their head office on the Rock would be regulated by the FSC, and could now “passport” (carry out its activities) into other European Economic Area territories, either under the doctrine of “Freedom of Services” or “establishment”.

But what exactly do these terms mean? Well, establishment involves setting up a branch in the country where the insurance company wants to insure risks – Freedom of Services means that the insurer can underwrite risks in the other country on a cross-border basis. Under EU law, the insurer can do this without needing to apply for a licence in that country, provided they follow passporting procedures and complies with the law of the country where they are insuring.

So in the early part of the 21st century, Gibraltar embarked on a series of initiatives to take advantage of its new status and enhance its offering for insurance.

Most notable of these was the passing of the Protected Cell Companies Ordinance in 2001, a piece of legislation that enabled companies to segregate into divisions focused on different types of insurance. A simple way to imagine this would be to think of a flower – with the core company in the middle and a variety of petals (divisions) surrounding it, financially independent from each other (and therefore safeguarded from liability for another division’s risks or losses) yet benefitting from the strengths and securities of the whole.

Over the next few years Gibraltar’s insurance industry grew and grew – today there are some 57 insurance companies fully operative on the Rock, as well as the various service providers that support the industry. There are a variety of insurers in Gibraltar, including captives, Protected Cell Companies, liability insurers, and property insurers. But the biggest success story has been in motor insurance, especially doing business in the UK market. Its 25 motor insurers cover one in six UK motorists, almost double the market share of Lloyd’s of London.

Gibraltar’s biggest challenge has probably been in terms of skill shortages. The community of the Rock numbers no more than 30,000 people, the size of a small market town, and often punches above its weight in terms of the talent it produces in politics and the arts. The legal and accountancy professions are popular choices among teenagers leaving school and going to further studies, and insurance works hard to attract leavers to the industry. Recent studies have shown however that insurance is one of the least popular graduate career choices in the UK and Gibraltar seems to be no different.

When I arrived in Gibraltar in 1987, there was a very small indigenous industry with a tiny international dimension – I was one of only two qualified insurance persons on the Rock and the other was a colleague of mine, also from the UK. Over the years though, we have drawn more young Gibraltarians into the industry. The establishment by the GIA in 2008 of the Gibraltar Insurance Institute both vastly improved educational standards within the industry, and helped bringing young people in. We’re still not quite as glamorous as barristers, but we’re getting there!

The GIA today has an excellent relationship with our regulator, the FSC, and with government. We speak loudly when issues arise, and we like to feel that we are listened to. Our community is one that listens and responds to its industries.

It’s a bit of an unlikely story; a rock steeped in history becoming the base for a dynamic and modern financial centre. But the insurance industry, and other branches of the finance centre in Gibraltar, are living proof of the forward-looking and proactive business attitude that has infused this little bit of Britain at the foot of the Iberian Peninsula.

Chris Johnson ACII is chairman of the Gibraltar Insurance Association (GIA) and director of the Robus Group

Photo: Getty
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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'